Financial market frictions and diversification

Matvos, G and Seru, A and Silva, R (2016) Financial market frictions and diversification. Journal of Financial Economics. ISSN 0304-405X (In Press)

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Abstract

We document new facts, which relate the evolution of firm scope to the changing frictions in external capital markets over the last three decades. In the first part of the paper we study the scope of large, diversified publicly traded firms. We find that these firms increase their scope during times of high external capital market frictions, such as in the recent Great Recession. Moreover, during these times firms diversify their investment needs, and cash flows across industries. In the second part, we find similar phenomena outside diversified public firms. Examining the mergers and acquisitions activity of standalone and diversified private firms, we uncover similar patterns. In aggregate data, we find that the composition of mergers shifts from focused to diversifying and back with changes in external market conditions. Our evidence is broadly consistent with the notion that firms diversify their scope in response to tightening in external capital markets.

Item Type: Article
Additional Information: © 2016 Elsevier
Subjects: C > Conglomerate companies
C > Capital markets
T > Theory of the firm
Subject Areas: Finance
Date Deposited: 11 Nov 2016 15:48
Last Modified: 01 Sep 2017 13:03
URI: http://lbsresearch.london.edu/id/eprint/598

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